Israel’s credit rating cut again as conflicts drag on

New York (CNN) — Israel’s credit rating was downgraded by Fitch Ratings Monday, after the agency cited concerns around the ongoing war with Hamas and geopolitical risks.

Fitch kept a negative outlook on the country’s credit, meaning it could cut the rating again in the future, as it notched down the credit rating from “A+” to “A.”

The downgrade underscores the financial toll of the war, which has also seen tens of thousands of people killed and has shaken the region and the world. Analysts from Fitch said the “the conflict in Gaza could last well into 2025,” and there are risks of the conflict spreading.

“The downgrade to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts,” Fitch said in a statement.

Israeli military action in Gaza has killed nearly 40,000 Palestinians and injured over 90,000, according to Gaza’s Ministry of Health, after Hamas’ attack on Israel on October 7. At least 1,200 people were killed in southern Israel that day, and more than 250 others abducted in the Hamas-led assault, according to Israeli authorities.

Responding to Fitch’s decision, Israel’s Finance Minister Bezalel Smotrich said the rating downgrade was “natural” given the war and geopolitical risks but added that the country’s economy remained strong.

“Israel’s economy is strong and we are navigating it correctly and responsibly,” Smotrich said Tuesday in a post on X, adding that “the economic indicators point to the economy’s robustness and the high trust we have in the markets.”

As ceasefire negotiations remain in limbo, an Israeli air strike killed at least 93 Palestinians in a school and mosque in Gaza sheltering displaced people, according to local officials over the weekend. The United States is also set to provide Israel with $3.5 billion in military aid, CNN reported.

“In addition to human losses, (the conflict in Gaza) could result in significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment, leading to a further deterioration of Israel’s credit metrics,” Fitch said.

Downgrades in credit ratings could make it more difficult or expensive for a country to borrow money. An “A” rating is still considered investment grade, or among the safer groups of debt issuers.

The agency predicts Israel’s budget deficit to reach 7.8% of its gross domestic product in 2024, compared with 4.1% in 2023.

“We will pass a responsible budget that will continue to support all the needs of the war on all fronts until victory,” Smotrich said in his post on X.

The central government’s budget deficit is centered on military operations, mitigating economic disruptions, and also relocation expenses for the northern part of Israel as the potential for another front with Lebanese militant group Hezbollah looms in the coming weeks.

Fitch also expects Israel’s debt-to-GDP to remain above 70% into 2025, whereas the median A rating ratio is 55%.

Fitch said a de-escalation of the conflict and fiscal reforms that lower the debt-to-GDP ratio could help the the country get its rating back up.

Moody’s Investors Service downgraded Israel’s credit rating from A1 to A2, also still investment grade, in February. Moody’s said the primary driver of its decision was an “assessment that the ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.”

CNN’s Samantha Delouya and Irene Nasser contributed reporting.

This story has been updated with additional information.

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